Don’t let market volatility, liquidity issues and a looming recession ruin your financial future
By Puai Wichman, Founder & CEO of Ora Partners – an international trust provider and wealth management firm
A year into the Federal Reserve’s hawkish cycle, inflation has proven a difficult adversary. With at least one more rate hike expected from the Fed before a pause, the stress on the financial system has become apparent. The failure of three banks in March created panic and caused swift action from regulators to address liquidity concerns. A banking crisis, on top of lingering inflation, has shaken confidence in the safety of our assets in a vulnerable and volatile fiscal environment.
However, there are steps that investors can take to future proof their assets. To protect and grow wealth over time, attention to risk is necessary. By assessing risks and implementing strategies to mitigate them, individuals can safeguard their net worth and preserve their financial stability, regardless of market stress and fiscal policy. No matter the environment, here are four ways that investors can ensure their assets are well-protected from threats in today’s market and in the future.
- Conduct a risk inventory of your assets
Viewing assets and net worth through the lens of a risk manager can help investors avoid making emotional or impulsive investment decisions. Fear and greed can lead investors to take on too much risk or abandon a sound investment strategy. From a risk manager’s perspective, though, the more insidious mistake may be complacency. Complacency can leave investors exposed to substantial risks that they haven’t considered, and those unexamined risks often pose the largest threat to a nest egg or generational wealth.
By implementing a risk management plan and sticking to it, investors can avoid making irrational decisions and stay focused on their long-term goals. A risk inventory of your assets enables you to identify potential threats and take proactive measures to protect yourself against them. A comprehensive view of our assets can also reveal opportunities to take calculated risks to build wealth.
The assets in your risk inventory may include income sources, real estate, investments, savings accounts, and other financial holdings. Some risks to these assets are well-known, such as the threat that the stock market falls, or the possibility that natural disasters present in real estate. But, to future-proof our assets, we need to evaluate several other categories of risk and implement a plan to address those risks. Those categories include:
- Risk of income loss: This is the risk that you will experience a decrease in income or lose your source of income altogether. This can be caused by factors such as job loss, illness, or economic downturns.
- Concentration risk: This is the risk of having a disproportionate amount of your wealth invested in a single asset or asset class. For example, if you invest a large portion of your portfolio in a single stock or industry, you are exposed to concentration risk. A common example is having too much invested in your employer’s stock.
- Counterparty risk: This is the risk that the other party in a financial transaction, such as a trade or investment, will not fulfill their obligations. For example, if you enter into a contract with a counterparty and they fail to deliver the promised asset or pay the agreed-upon price, you are exposed to counterparty risk.
- Currency risk: This is the risk that changes in exchange rates will negatively impact the value of your investments or income.
- Litigation risk: This is the risk of being involved in a lawsuit that could result in financial loss or damage to your reputation. This risk can arise from a variety of sources, such as business activities, investments, or personal relationships. Litigation risks may increase for business owners and other high-net worth individuals, as they may become targets of commission-based lawsuits.
Starting a risk inventory can be as simple as listing your assets and the types of risks the assets are exposed to. Keep in mind that some risks are unavoidable, making it even more important to identify the risks we can control and mitigate those risks through effective planning and preparation – especially with the support of a financial advisor. Everyone’s tolerance for risk differs, and financial planning that begins with a risk inventory can help ensure that your plans are aligned with your tolerance.
- Place the ownership of your assets in an airtight offshore trust
Once you understand the risks that impact each of your assets, it can be easy to rush into your current accounts and begin reallocating investments or changing insurance coverage. These are both important steps, but jumping into them without first assessing and addressing the ownership structure of the assets is a mistake that may inhibit or complicate the process of future-proofing your assets.
Unless your assets are already held in a well-designed trust, you may be exposed to avoidable pitfalls. Major assets, such as brokerage accounts or real estate, are often held in individual ownership or in joint ownership. Assets held in joint ownership are legally designated as either “Joint Ownership with Rights of Survival” or as “Tenancy in Common”, depending on the jurisdiction of the account. While there are some legal nuances that impact litigation of these different types of ownership structures, owning an account jointly in either manner can leave your assets exposed to the creditors of the other owners.
Establishing trusts to hold assets can mitigate these risks, as well as provide tax and estate planning benefits. Trusts that are created under ownership-friendly legal frameworks can protect your assets – whether held individually or jointly – from creditors. Trusts also offer privacy protection, making trusts an effective vehicle for reducing counterparty and litigation risks.
Holding assets in an offshore trust can further reduce litigation and counterparty risks, as long as the trust is established in jurisdictions with laws that protect an individual from frivolous and contingency based lawsuits. The Cook Islands, for instance, has a mature framework of trust laws that support asset protection and privacy, along with a robust body of judicial precedent that validates the integrity of the country’s trust laws. Cook Islands’ trust law offers some of the strongest asset protection provisions in the world, with assets in its trusts well-protected from creditors, lawsuits, and judgments.
Working with experienced, well-established professionals to set up and manage your offshore trust can ensure that you not only optimize the risk-reduction benefits but protect your hard-earned wealth.
- Diversify your assets thoroughly
After taking an inventor of your risks and you’ve mitigated your exposure through trust ownership, then ensuring your investments are well-diversified is the next step in future-proofing your assets. A well-diversified portfolio can reduce investment risks by spreading those risks across different asset classes such as stocks, bonds, commodities, real estate, and cash, all of which perform differently as market cycles change.
Diversification should start with the broad allocations to each asset class and should be aligned with an individual’s risk tolerance and time horizon. For example, if investments are needed within a few years, greater weight should be given to shorter-term investments like bonds and money markets. In contrast, if there is a longer time horizon, putting more in stocks can help reduce inflationary threats, but stock allocation should still comport with an individual’s tolerance for market swings.
To shore up your portfolio for the future, diversification should be thorough, especially as your assets grow. After determining broad asset allocation targets, investors should further diversify within each asset class to reduce concentration risk. This could involve investing in different-sized companies, developed and emerging markets, and different durations of bonds.
Diversifying assets among different currencies can reduce the risk of a single currency suffering from a country’s economic policies and shocks. This is particularly relevant for investors with a global portfolio. Additionally, option contracts can be used to adjust a portfolio’s risk profile. For instance, option contracts can be used to hedge outsized positions, such as large investments in company stock. This can help reduce the impact of market volatility and protect against significant losses.
Cash management is also a crucial consideration when balancing your portfolio. It’s important to ensure that cash is available during an emergency. Diversifying cash across different accounts and financial institutions can help mitigate the risk of a bank failure preventing access to funds.
Investors wanting to mitigate investment risk even further may want to consider annuities. Annuities can be used as a form of retirement income or as a way to invest and grow your money tax-deferred. There are different types of annuities, including fixed annuities, variable annuities, and indexed annuities. While fees can be high and should be considered, annuities may provide attractive guarantees of lifetime income.
Implementing these diversification strategies can help investors achieve a balanced approach to risk management and reduce the potential impact of market volatility on their assets. An experienced investment professional can help investors implement the various diversification strategies required to achieve a well-balanced portfolio that can withstand future market shocks.
- Maintain the proper insurance coverage for assets
The purpose of insurance is to reduce risks to our assets, so we should consider our inventory when choosing coverage levels. Common types of insurance to consider include homeowner’s, auto, umbrella, health, disability, and life insurance. Making sure we have adequate policy coverage in these areas is paramount during the accumulation phase of wealth-building. Once you have built a substantial nest egg, you may be able to save money by self-insuring some of your assets.
When deciding on the level coverage, understanding your risk tolerance can go a long way to determine your needs. For instance, choosing among the myriad of options in life insurance often begins with balancing your needs for stability with your ability to accept some investment uncertainty.
Remember, Risks Present Opportunities
As we take proactive measures to future proof our assets, we also want to keep in mind that future-proofing our assets is not just about protecting them from harm, but also about finding opportunities to build wealth. We can’t eliminate all risk, nor would we want to. In the end, a crucial part of financial planning is ensuring the safety of what you currently own and working with an advisor can help you navigate issues especially during times of market volatility, liquidity issues and a looming recession.
About the author:
Puai Wichman serves as the CEO and Founder of Ora Partners – an international trustee and wealth solutions firm. In this role, he plays an integral part leading the firm’s services and serves as a trusted resource for high-net worth individuals and their families to implement estate and wealth preservation plans.
Wichman has 30 years of experience in the asset protection business and a deep understanding of the offshore financial services sector of the Cook Islands. With access to some of the best performing financial planners in the world, he offers his clients the means to safely navigate today’s volatile economic and geo-political world. Wichman works closely with a global network of top professionals across law, investment, tax, and emerging technologies to help families find strategic investments and a secure place to conduct business.
In addition to his deep knowledge of wealth preservation, Wichman is a qualified lawyer admitted in both the Cook Islands and New Zealand. Outside of the office, he remains devoted to professional organizations including the Cook Islands Law Society. Wichman earned a Bachelor of Laws (LLB) at the University of Auckland.